Michael Porter mapped out a simple, but powerful model for deeper understanding of the marketplace in 1979. The five forces model provides a way to examine the competitive environment and identifies ways to win. I’ve rarely heard it talked about by agency personnel but consultants and other professionals in business intelligence use it as a core concept.
Porter found the process not only useful for developing the strategic plan, but also critical to understanding the structure of the industry. Nothing happens in a vacuum, but for some reason advertising agencies expect strategy for their clients to work that way. For those who employ it, the five forces allows them to have a look around the world their client’s business inhabits and map out the wider context. It’s impossible to make decisions without that context. Or at least, intelligent decisions.
The First Force Is Competitive Rivalry. This force looks at the intensity of the competition in the industry, but goes beyond the traditional. We start with the known category players and examine their offerings, pricing and customer base. When we describe rivalry, it’s considered high if there are few players, product or category parity and low or no barriers to prevent customers from switching brands. The cola wars are a great example of high competitive rivalry in an industry. Two big players, nearly identical products and ease of switching. In this environment, advertising and price wars often occur.
The Bargaining Power Of Suppliers Is Force Two. As in any industry, and in the first force, competition drives cost. This goes levels and levels deep. Apple has a potential problem with screen manufacturers because suppliers are rare. The fewer suppliers, the more control they have over pricing.
This is why the DeBeers Corporation goes to such lengths to control the supply of diamonds. They’re the only supplier so they get to keep costs high. If you’re a manufacturer that uses diamond for your product, profitability is threatened by the control DeBeers has. If they raise prices, you are forced to choose between raising prices of your own product or cutting margins.
Force Number Three Is The Bargaining Power Of Customers. When there are many brands in a category, and high ease of switching as identified in competitive rivalry. Customers can impact pricing, especially when they are an in-demand or smaller audience. This all relates back to the laws of supply and demand. Many options for consumers usually drives down cost and makes business harder and less attractive.
Mattresses are an example of an industry that has suffered from increased bargaining power of customers. Going back 10 years, there were only a few players locked into tight distribution deals and (overly high) prices. But advances in materials, production, shipping and distribution via the internet has loosened the choke hold of Sealy and Serta. Customers rarely need to buy in this category, and they finally have some control, which they are happily exercising. A handful of foam mattress brands have broken through, thanks to renewed bargaining power of consumers. Leesa, Tuft & Needle, Loom & Leaf, Lull; too many to count. Now, prices are coming down as competition has increased bargaining power of customers.
As with industry attractiveness, strategists must look at the ability for other companies to enter the market. Force Number Four Is The Ability Of New Entrants. Especially today, this is a huge concern, which is often (always?) overlooked. See: Amazon buys Whole Foods. What other companies or brands could enter the market we’re examining?
Using our cola example, Virgin entering the market was a splashy move based on their understanding of the marketing and distribution needed to compete. Ultimately failing in US markets, they did well in the early stages. The critical piece for strategists is to look at the marketplace and investigate what other brands could make a move to enter the market. Not easy to do, but necessary to protect brand and business interests over the long term. Most companies don’t look for indirect models. Look at your client’s business and make some educated guesses about who may enter their category based on similar audiences, distribution, products or supply chain.
In the same vein is The Fifth And Final Force – The Threat Of Substitutes. Once, Blackberry was a powerful company because of the uniqueness of its flagship product. It’s barely mentioned anymore. Why? Touchscreen smartphones from Apple and Google’s partners et al replaced it. So, why did consumers switch? The product was superior and offered at a competitive price point through intelligent distribution with mobile carriers. In Apple’s case, they also built a unique supplier network that kept Blackberry from making any defensive moves. If you remember, the co-CEOs of Blackberry dismissed the iPhone because of battery life and security deficiencies – core strengths of their device. They didn’t understand that people would be willing to make that substitution for a touchscreen experience. “We’ll be fine,” Jim Balsillie was quoted as saying.
The five forces model helps fill in the context, but it leaves out partnerships and strategic alliances. It’s also just the model, and importantly does not include guidance for action. As a strategist, that’s where you come in. None of these tools mean anything on their own. They have strength when you tie tools together with marketing prowess to draw conclusions. When competitive rivalry is high, advertising needs to stand out. Niche markets create more power for the brand, so you need to figure out ways to put your brand or your client’s brand in a niche or to emulate one.
Contributed to Branding Strategy Insider by: Adam Pierno. Excerpted and adapted from his book Under Think It.
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